More U.S. SEC enforcement of anti-laundering lapses likely, official says

Broker-dealers would be wise to devote sufficient resources to their anti-money laundering programs because it is likely the Securities and Exchange Commission will be issuing an increasing number of “stand alone” enforcement actions against firms that fail to comply with the Bank Secrecy Act, a senior SEC official said Monday.
“I think you’re going to be seeing more regulatory action in this particular area,” Lourdes Gonzalez, assistant chief counsel with the SEC’s Division of Trading and Markets, said at a conference held by the Association of Certified Anti-Money Laundering Specialists (ACAMS), a trade group. The conference in Hollywood, Florida was monitored via the Internet.

Firms that have good Bank Secrecy Act (BSA) compliance programs “on paper” but which fail to implement their anti-money laundering (AML) controls, as well as those that fail to “staff up” to the extent necessary to manage risk, are in particular jeopardy of enforcement actions, Gonzalez said. The presence of “under-resourced” AML functions is a common theme at firms that end up facing SEC enforcement actions, she added.

“It may not pop out when you look at the orders, but it is a common thing to the orders we bring. So you can go back to the people who have the purse strings at your firm and say look, this is a common theme in the cases the SEC and (the Financial Industry Regulatory Authority) bring,” Gonzalez told the audience of AML professionals from banks, brokerage firms, money transfer businesses and others.

Some firms have failed to meet their independent testing obligations – one of the required “prongs” of a BSA compliance program — or filed no Suspicious Activity Reports (SARs) with authorities, Gonzalez added. Small firms face special challenges, which is significant because while there are some very large broker-dealers, much of the industry consists of small shops, she said.

“I’m always struck by the fact that in the securities industry, half of all broker-dealers have ten or fewer employees. So you end up having an AML officer who is also the guy making the coffee,” she said.

Due diligence rule looms large

Customer due diligence (CDD) challenges also were discussed during the conference panel, in part because of a new Treasury Department rule that goes into effect in May 2018 and requires, among other things, that banks, broker-dealers and others collect information about the true, of “beneficial,” owners of legal entity accounts.

The beneficial ownership obligation is “a big new requirement” and “there is a lot to think about” as banks spend large sums to upgrade IT systems and develop information collection processes, said Rick Small, director of the financial crimes program at BB&T and the lone industry representative on the panel.

“The rule is the rule, but sometimes there are different expectations, there are different interpretations, we haven’t heard a lot about that yet and I’m hoping in the coming months we’ll start hearing more from our examiners about what their thoughts are, what their expectations are, around what … a successful implementation to meet the requirements looks like,” Small said.

Examination procedures for the Treasury CDD rule are “in development and that is why nobody’s been talking about them” to date, said Suzanne Williams, a senior official with the Board of Governors of the Federal Reserve System.

“2017 is the year that both the industry and supervisors will be gathering and developing what will be the supervision for (the rule),” she said.
As demonstrated by an informal attendee poll taken during the panel, many firms expect “to be done with their implementation by the end of 2017,” Small said, adding that guidance from supervisors would therefore be useful now.

“Some banks are spending millions upon millions of dollars out of a necessity to change systems. If there is an expectation that we’re not yet aware of, knowing that sooner rather than later is going to be extremely helpful as we move forward,” he said.

Brokerage firms need to better document knowledge

Although brokerage firms often are better positioned to know more about customers due to suitability requirements, “documentation is really the key,” said Sarah Green, senior director for enforcement and BSA policy with the Financial Industry Regulatory Authority (FINRA).

“There are a lot of firms that really know their business, know their customers and they know their risks, not all of them document all these facts. When we come in as examiners, it’s hard for us just to take your word for it,” she said.

FINRA examiners also are focused on firms’ delegation of AML responsibilities, and are checking to see that obligations are clearly defined and that units counted on to perform a particular task are actually doing so, because confusion around responsibilities has led to compliance lapses at firms in the past, Green said.
“We want to make sure that everyone has the same understanding,” she said. FINRA also is updating its small firm AML template as well as its list of “red flags” and it welcomes input from firms, Green said.

In January the SEC issued a cease-and-desist order against New York-based brokerage firm Windsor Street Capital and its former anti- money laundering officer, John D. Telfer, for allegedly failing to report nearly $25 million in suspicious penny stock transactions. Unlike past SEC actions, the case was based entirely on AML lapses.
“It’s new for the SEC to bring the first stand-alone case and you will probably see more of those in the future,” the SEC’s Gonzalez said.

Remedy for “rogue” examiners

She added that firms that believe they are being treated unfairly by a “rogue” examiner can file an electronic Tips, Complaints and Referrals form, or TCR, on the SEC’s website.

“It doesn’t look like it applies to examiners, but if you have a real disagreement, it’s something you can use. And firms have used it (to say) ‘We have an examiner and we have a complete disagreement with what they’re saying,'” she said.
The SEC meets with FINRA quarterly and will look at the “fact pattern” described in the TCR document and ultimately will rule on “what we think the answer is.”

Published 04-Apr-2017 by
Brett Wolf, Regulatory Intelligence

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